Why David Laws is very wrong on the state of the recovery

In the week when unemployment has hit a 17 year high, David Laws picked a great moment to proclaim the existence of ‘the great democratic recession‘. According to his analysis we need to keep our pessimism in check – there’s lots to be cheerful about.

The main reason for this outburst of optimism turns out to be that ‘everyone feels the pain, rather than just certain sections of the community as in the Eighties and Nineties’. Apparently the ‘democratic nature’ of the recent downturn, combined with various pieces of recent ‘good news’, mean that it’s time to stop worrying. Unfortunately, this assessment doesn’t stack up.

Firstly, it simply isn’t the case that the downturn is affecting all of us equally. Those in the lowest paid work are always more likely than everyone else to lose their jobs, and during an economic slowdown their risk increases more quickly than is the case for middle and higher paid workers. And those in the lowest paid work do not only have the highest risk of unemployment, they also face the highest risk of spending more than six months out of work and ending up in long-term unemployment.

Different areas of the UK are also feeling differential amounts of pain. The downturn has hit economically weaker areas of the country far more than those which were already better off – hence current unemployment rates of 12 per cent in the North East (with a 2.3 point annual increase) compared 6.4 per cent in the South East (a far lower increase of 0.7 points). With public sector job losses set to hit those areas which already have higher rates of unemployment, regional inequalities look set to become worse not better.

There’s also the question of who is hardest hit by the current living standards squeeze. It’s absolutely right that real wages are falling for the many rather than the few, and have been for over two years. But with the poorest fifth of households having far higher inflation rates than those in higher income deciles, and those who are underemployed in temporary or shift work more likely to be lower paid (and facing both the impacts of falling wages and not enough work), again those on lower incomes are worst affected. And of course, rising inflation costs will inevitably form a higher proportion of the income of those with lower incomes (a £20 rise in basic weekly food costs will by definition form 20 per cent of the weekly budget of someone living on £100 a week, but only 4 per cent of the weekly costs of someone with £500 a week to spend).

In addition, ongoing falls in household incomes are accompanied and exacerbated by the steepest programme of public spending reductions since WW2 – something Laws neglected to include in his article. Extensive IFS analysis has regularly shown that the distributional impacts of government’s programme of spending reductions are anything but fair. As the TUC showed at the time of the Comprehensive Spending Review, the poorest are being affected by cuts 15 times more than higher household incomes.

The second part of the Laws case for optimism rests on various pieces of supposed good economic news. But again the analysis is suspect.

Laws is right that falling inflation will help squeezed household budgets, but if earnings growth continues to fall then real wages will remain negative, ndeed the OBR say that they are set to fall throughout 2012. And when benefit and tax credit cuts are built in, the prospects for household incomes over the next year aren’t looking great. The rise in the tax tax-free personal allowance will provide an additional £120 a year for anyone on basic rate tax, but this is an amount that pales into insignificance compared to the cuts in household incomes many will be facing (for example, a duel earner household on an annual income of £26,000 paying for part-time childcare is set to lose over £1,500 in tax credit cuts alone by April 2012).

We also hear that ‘the Government has now delivered most of its bad news’, with the continued impact of that news, and the additional, steeper and as yet unspecified spending cuts that the Chancellor has factored in for after the next election easily glossed over – and that the low pound is a cause for celebration. Of course it’s better to have lower rates, which has had some benefit for exports as well as homeowners (at least those not in negative equity and on variable rates), but with domestic consumption (which makes a far greater economic contribution) continuing to fall through the floor and growth projections worsening, it’s hard to see how it can bring much cheer.

The Daily Mail often produces factually inaccurate analysis. So perhaps it’s no surprise that an ex-Cabinet Minister would choose to use the paper to promote a misleading picture of the state of the economy. But however warm his words, for many they simply won’t ring true.

Written by Nicola Smith

I’m Head of the Economic and Social Affairs Department at the TUC. I also represent the TUC on the Social Security Advisory Committee. My posts may therefore range from the environment to the welfare state via macro-economic policy but will inevit…